T<scp>he</scp> A<scp>cquisition of</scp> R<scp>estructured</scp> F<scp>irms</scp>: A<scp>n</scp> I<scp>llustration of</scp> M<scp>arket</scp> D<scp>iscipline</scp>?

Seward, James K.; Walsh, James P.

doi:10.1111/j.1430-9134.1995.00585.x

Cited by 8 publications

(5 citation statements)

References 21 publications

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“…The impact of C-level managerial capabilities is intriguing because C-level executives commonly leave acquired firms within a few years of an acquisition (Seward and Walsh, 1994). Nonetheless, despite the pending departures, such executives-and their executive teams-play key roles in integrating target and acquiring firms (Haspeslagh and Jemison, 1991).…”

Section: Resultsmentioning

confidence: 99%

“…Lower level managerial capabilities are less integrated throughout the organization, which results in a lower level of embeddedness and less susceptibility to market failure, reducing the need for acquisitions to preserve their value. The impact of C-level managerial capabilities is intriguing because C-level executives commonly leave acquired firms within a few years of an acquisition (Seward and Walsh, 1994). Nonetheless, despite the pending departures, such executives -and their executive teams-play key roles in integrating target and acquiring firms (Haspeslagh and Jemison, 1991).…”

Section: Model 2 Inmentioning

confidence: 99%

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Unpacking Firm Exit at the Firm and Industry Levels: The Adaptation and Selection of Firm Capabilities

Fortune

Mitchell

2011

Strategic Management Journal

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Evolutionary theory of business activity studies how firms are selected out of environments that they do not fit, but most existing work under-emphasizes the distinction between acquisition and dissolution as selection processes. We address this gap with a multi-level analysis that investigates how managerial and functional organizational capabilities affect whether struggling firms exit by acquisition or dissolution. We demonstrate that managerial and functional capabilities have heterogeneous effects on selection processes, with managerial capabilities having particularly strong influence on acquisition exits by struggling firms. The work provides a bridge between adaptation and selection views on organizational change; exit by dissolution represents selection of both firms and capabilities, while exit by acquisition represents firm selection but capability adaptation.Key words: Selection, capabilities, acquisition, dissolution, evolutionary theory, business dynamics 1 One of the fundamental tensions in strategic management theories of business evolution concerns the distinction between adaptation and selection when firms encounter problems. Early strategic management research typically assumed that business change primarily occurs by adaptation, in which executives of struggling firms actively lead strategic change of their underlying business capabilities (e.g., Cyert and March, 1963; Andrews, 1971). The evolutionary theory revolution of the 1970s and 1980s then highlighted the presence of strong firm-level inertia, which leads to population-level change in which many struggling firms fail to adapt and, as a result, exit from an industry Freeman 1977, 1989;Gort and Klepper, 1982;Nelson and Winter, 1982, 2002). Follow on studies have typically sought to demonstrate whether and when adaptation or selection tends to be the most pronounced force. What this debate has under-emphasized, though, is that different forms of exit -particularly, the contrast between shutting down and being acquired -have different implications for adaptation and selection. This paper argues that selection and adaption can occur concurrently at the firm and capabilities levels of analysis when one considers different forms of exit.We focus on the difference between business dissolution and business acquisition of struggling firms, emphasizing how different forms of exit reflect the evolutionary influence and fate of business capabilities. In particular, we argue that business dissolution entails a selection process that removes both a corporate entity and its underlying capabilities from the landscape, while acquisition represents a selection process that removes the corporate entity but preserves some of its organizational capabilities within the economic environment. We then argue that the extent of firm-specific managerial and functional capabilities influence whether a struggling firm exhibiting lackluster financial performance exits by acquisition or by dissolution. Hence, the paper studies mechanisms that shape micro le...

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Section: Resultsmentioning

confidence: 99%

Section: Model 2 Inmentioning

confidence: 99%

Unpacking Firm Exit at the Firm and Industry Levels: The Adaptation and Selection of Firm Capabilities

Fortune

Mitchell

2011

Strategic Management Journal

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“…Some might even see performance-contingent compensation serving as an incentive for CEOs to put their company in play and so reap the rewards of the acquisition premium. While Seward and Walsh (1994) investigated the relationship between the design of post-restructuring internal controls and subsequent external control contests, the link to performance in this relationship is still unexamined.…”

Section: Future Research Implicationsmentioning

confidence: 99%

The Governance and Control of Voluntary Corporate Spin‐offs

SEWARD¹,

WALSH²

1996

Strat. Mgmt. J.

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We investigate the role that a voluntary corporate restructuring can play in the design of efficient internal corporate control mechanisms. To this end, we examine the postrestructuring internal control practices in 78 voluntary corporate spin-offs that were completed between 1972 and 1987. We find that the selection of the new CEOs, the design of their compensation contracts, and the staffing of the boards of directors and their compensation committees in the spun-off firms can be seen as ex ante eficient. These governance and control practices, however, are not strongly related to the observed positive market reactions to the spin-off announcements. The results indicate that equity reorganizations facilitate the implementation of efficient internal governance and control practices, but that other factors must influence the share price reactions to the announcement of such voluntary corporate restructurings.

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“…The higher the pay-performance sensitivity, the greater the improvements in operating performance post-spinoff. Seward and Walsh (1995) propose that the likelihood of becoming a takeover target should be higher for spun off firms with little CEO equity incentives. They find that the takeover probabilityhostile as well as friendly -increases with the CEO's stock and option ownership in the spun off subsidiary.…”

Section: Corporate Governancementioning

confidence: 99%

Corporate Restructuring

Gopalan¹

2006

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We survey the empirical literature on corporate financial restructuring, including breakup transactions (divestitures, spinoffs, equity carveouts, tracking stocks), leveraged recapitalizations, and leveraged buyouts (LBOs). For each transaction type, we survey techniques, deal financing, transaction volume, valuation effects and potential sources of restructuring gains. Many breakup transactions appear to be a response to excessive conglomeration and attempt to reverse a potentially costly diversification discount. The empirical evidence shows that the typical restructuring creates substantial value for shareholders. The value-drivers include elimination of costly cross-subsidizations characterizing internal capital markets, reduction in financing costs for subsidiaries through asset securitization and increased divisional transparency, improved (and more focused) investment programs, reduction in agency costs of free cash flow, implementation of executive compensation schemes with greater pay-performance sensitivity, and increased monitoring by lenders and LBO sponsors. Buyouts after the 1990s on average create value similar to LBOs of the 1980s. Recent developments include consortiums of private equity funds (club deals), exits through secondary buyouts (sale to another LBO fund), and evidence of persistence in fund returns. LBO deal financing has evolved toward lower leverage ratios. In Europe, recent deals are financed with less leveraged loans and mezzanine debt and more high-yield debt than before. Future research challenges include integrating analyses across transaction types and financing mixes, and producing unbiased estimates of the expected return from buyout investments in the presence of limited data on portfolio companies that do not return to public status.

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The Acquisition of Restructured Firms: An Illustration of Market Discipline?

Cited by 8 publications

References 21 publications

Unpacking Firm Exit at the Firm and Industry Levels: The Adaptation and Selection of Firm Capabilities

Unpacking Firm Exit at the Firm and Industry Levels: The Adaptation and Selection of Firm Capabilities

The Governance and Control of Voluntary Corporate Spin‐offs

Corporate Restructuring

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